EA Bets on The9

Investors holding shares of The9 (Nasdaq: NCTY  ) have had a pleasant surprise today: The shares have gone wild on news that Electronic Arts (Nasdaq: ERTS  ) is establishing a stake in the Chinese online-gaming concern.

The deal is worth $167 million, and EA will own 15% of The9. Through the agreement, The9 will gain exclusive publishing rights for EA Sports FIFA Online in China, a move that will expand its online game offerings in the country (while EA gains greater exposure).

Some Fools are no stranger to The9 -- in fact, it's got a stellar five-star rating in the Motley Fool CAPS community. Fool contributor Will Frankenhoff has often expressed his optimism about The9 and has written many times about the possibility that it could be a more appealing Chinese Internet play than companies such as Shanda Interactive (Nasdaq: SNDA  ) and NetEase.com (Nasdaq: NTES  ) . Back in January, Will nominated The9 as the best e-commerce stock for 2007. He pointed out its significant place in the Chinese gaming market -- notably, it has the Chinese rights for the wildly popular World of Warcraft game, from Vivendi's (NYSE: V  ) Blizzard Entertainment -- and he observed that it looked reasonably priced based on several financial metrics compared to its impressive growth in sales and profits.

Apparently, EA perceived The9 as a logical place to invest some money, too. EA may have its share of challenges right now, but purchasing a stake in The9 seems to segue right into the keys for growth that it outlined recently. If two of EA's planned avenues for growth are the Asian market and online opportunities, a stake in The9 and the related benefits seems like a good place to start. Despite its large population and the popularity of online gaming, Asia represents only a small percentage of EA's business at the moment. (Last I heard, just 5% of EA's revenues came from Asia.) Exposure to Chinese gamers through The9 certainly seems like a good move for EA, and in keeping with recent suggestions, it might focus on partnerships to move into countries that might be tough to crack, as it appears to have done in Japan.

Of course, there are risks inherent in China; take, for example, recent word that the Chinese government was trying to put the brakes on new Internet cafes, where many Chinese gamers get their fixes. (Longtime Fool Rick Munarriz offered some optimistic thoughts on that topic recently, though.) Given that EA has experienced a few stumbles here lately (its latest quarter had some disappointing elements), it seems clear that the company has little choice but to aggressively pursue the most promising growth channels, and this move seems like a decent start.

Electronic Arts is a Motley Fool Stock Advisor recommendation. Shanda Interactive and NetEase.com are both Motley Fool Rule Breakers picks. Try either newsletter free for 30 days to browse the other entertainment stocks these services have recommended.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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